-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mx4WO12e8sUyFKoMWHmougS9EhaoDcIdfDznTH+e2012vuHXrVL+7UxOhIOU/xUw 5ay8sq6Sk1Nv0vzHX9TKyA== 0000950135-01-501226.txt : 20010515 0000950135-01-501226.hdr.sgml : 20010515 ACCESSION NUMBER: 0000950135-01-501226 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010401 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC CENTRAL INDEX KEY: 0001036960 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 043363001 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15181 FILM NUMBER: 1632430 BUSINESS ADDRESS: STREET 1: 82 RUNNING HILL RD CITY: SOUTH PORTLAND STATE: ME ZIP: 04106 BUSINESS PHONE: 2077758100 MAIL ADDRESS: STREET 1: 82 RUNNING HILL RD CITY: SOUTH PORTLAND STATE: ME ZIP: 04106 FORMER COMPANY: FORMER CONFORMED NAME: FSC SEMICONDUCTOR CORP DATE OF NAME CHANGE: 19970424 10-Q 1 b39247fse10-q.txt FAIRCHILD SEMICONDUCTOR 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 001-15181 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-3363001 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
82 RUNNING HILL ROAD SOUTH PORTLAND, MAINE 04106 (Address of principal executive offices, including zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 775-8100 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. The number of shares outstanding of the issuer's classes of common stock as of the close of business on May 7, 2001:
TITLE OF EACH CLASS NUMBER OF SHARES ------------------- ---------------- Class A Common Stock, par value $.01 per share............ 99,455,734 Class B Common Stock, par value $.01 per share............ 0
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of April 1, 2001 (Unaudited) and December 31, 2000........................... 3 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended April 1, 2001 and April 2, 2000........................................................ 4 Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended April 1, 2001 and April 2, 2000............................................... 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended April 1, 2001 and April 2, 2000........................................................ 6 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 30 Item 6. Exhibits and Reports on Form 8-K............................ 30 SIGNATURE............................................................ 31
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
APRIL 1, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 377.6 $ 401.8 Accounts receivable, net.................................. 195.1 225.0 Inventories............................................... 244.1 192.8 Deferred income taxes..................................... 47.3 47.3 Other current assets...................................... 8.6 9.5 -------- -------- Total current assets.............................. 872.7 876.4 Property, plant and equipment, net.......................... 684.9 596.6 Intangible assets, net...................................... 514.8 298.1 Other assets................................................ 83.9 66.4 -------- -------- Total assets...................................... $2,156.3 $1,837.5 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 137.6 $ 155.3 Accrued expenses and other current liabilities............ 115.8 136.9 -------- -------- Total current liabilities......................... 253.4 292.2 Long-term debt.............................................. 1,059.1 705.2 Other liabilities........................................... 3.1 2.4 -------- -------- Total liabilities................................. 1,315.6 999.8 Commitments and contingencies Stockholders' equity: Class A common stock...................................... 1.0 0.8 Class B common stock...................................... -- 0.2 Additional paid-in capital................................ 801.4 801.1 Retained earnings......................................... 43.4 41.8 Accumulated other comprehensive income.................... 2.3 -- Less treasury stock at cost............................... (7.4) (6.2) -------- -------- Total stockholders' equity........................ 840.7 837.7 -------- -------- Total liabilities and stockholders' equity........ $2,156.3 $1,837.5 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 3 4 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED ---------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- Revenue: Net sales -- trade........................................ $367.8 $368.9 Contract manufacturing.................................... 17.5 32.8 ------ ------ Total revenue..................................... 385.3 401.7 Operating expenses: Cost of sales -- trade.................................... 255.0 244.5 Cost of contract manufacturing............................ 12.2 20.0 Research and development.................................. 23.5 17.8 Selling, general and administrative....................... 53.7 53.4 Purchased in-process research and development............. 12.8 -- Restructuring and impairments............................. 9.5 (5.6) ------ ------ Total operating expenses.......................... 366.7 330.1 ------ ------ Operating income............................................ 18.6 71.6 Interest expense............................................ 23.9 20.8 Interest income............................................. (7.4) (4.0) ------ ------ Income before income taxes.................................. 2.1 54.8 Provision for income taxes.................................. 0.5 4.8 ------ ------ Net income.................................................. $ 1.6 $ 50.0 ====== ====== Net income per common share: Basic..................................................... $ 0.02 $ 0.53 ====== ====== Diluted................................................... $ 0.02 $ 0.51 ====== ====== Weighted average common shares: Basic..................................................... 99.3 94.2 ====== ====== Diluted................................................... 101.2 98.7 ====== ======
See accompanying notes to unaudited condensed consolidated financial statements. 4 5 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED ------------------------ APRIL 1, APRIL 2, 2001 2000 -------- -------- Net Income.................................................. $1.6 $50.0 Other comprehensive income, net of tax: Unrealized gain on derivative instrument.................. 2.3 -- ---- ----- Comprehensive income........................................ $3.9 $50.0 ==== =====
See accompanying notes to unaudited condensed consolidated financial statements. 5 6 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED -------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- Cash flows from operating activities: Net income................................................ $ 1.6 $ 50.0 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred compensation................ 0.7 0.9 Depreciation and amortization........................ 39.8 37.5 Restructuring, net of cash expended.................. 8.7 (2.1) Loss on disposal of fixed assets..................... 0.6 0.8 Non-cash interest expense............................ 1.0 1.0 Purchased in-process research and development........ 12.8 -- Deferred income taxes................................ (2.4) (0.1) Changes in operating assets, liabilities, net of effects of acquisitions: Accounts receivable.................................. 26.1 (15.2) Inventories.......................................... (19.4) (4.7) Other current assets................................. 10.1 (2.8) Accounts payable..................................... (17.7) (12.4) Accrued expenses and other current liabilities....... (24.1) (7.0) Other assets and liabilities, net.................... (4.6) (1.6) ------- ------ Cash provided by operating activities............. 33.2 44.3 ------- ------ Investing activities: Capital expenditures...................................... (47.4) (37.6) Purchase of molds and tooling............................. (1.1) (0.6) Purchase of long-term investments......................... (3.5) -- Acquisitions, net of cash acquired........................ (343.1) -- ------- ------ Cash used in investing activities................. (395.1) (38.2) ------- ------ Financing activities: Repayment of long-term debt............................... -- (0.8) Issuance of long-term debt................................ 350.0 -- Proceeds from issuance of common stock and from issuance of stock options, net.................................. 1.8 241.0 Purchase of treasury stock................................ (3.4) -- Debt issuance costs....................................... (10.7) -- ------- ------ Cash provided by financing activities............. 337.7 240.2 ------- ------ Net change in cash and cash equivalents..................... (24.2) 246.3 Cash and cash equivalents at beginning of period............ 401.8 138.7 ------- ------ Cash and cash equivalents at end of period.................. $ 377.6 $385.0 ======= ======
See accompanying notes to unaudited condensed consolidated financial statements. 6 7 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The Condensed Consolidated Balance Sheets of Fairchild Semiconductor International, Inc. (the "Company") as of April 1, 2001 and December 31, 2000, and the Condensed Consolidated Statements of Operations, Comprehensive Income and Cash Flows for the three months ended April 1, 2001 and April 2, 2000, were prepared by the Company. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position and results of operations of the Company. Interim results of operations are not necessarily indicative of the results to be expected for the full year. This report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2000. Certain prior period amounts have been reclassified to conform to their current presentation. NOTE 2 -- INVENTORIES The components of inventories are as follows:
APRIL 1, DECEMBER 31, 2001 2000 -------- ------------ (IN MILLIONS) Raw materials............................................... $ 31.1 $ 24.8 Work in process............................................. 163.3 123.9 Finished goods.............................................. 49.7 44.1 ------ ------ Total inventories................................. $244.1 $192.8 ====== ======
NOTE 3 -- COMPUTATION OF NET INCOME PER SHARE Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options. There were 9,423,257 anti-dilutive common stock options outstanding at April 1, 2001 and none at April 2, 2000. The following table reconciles basic to diluted weighted average shares outstanding:
THREE MONTHS ENDED -------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- (IN MILLIONS) Basic weighted average common shares outstanding............ 99.3 94.2 Net effect of dilutive stock options based on the treasury stock method using the average market price............... 1.9 4.5 ----- ---- Diluted weighted average common shares outstanding.......... 101.2 98.7 ===== ====
7 8 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED -------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- (IN MILLIONS) Cash paid for: Income taxes.............................................. $ 3.2 $ 1.5 ===== ===== Interest.................................................. $18.0 $19.2 ===== =====
NOTE 5 -- ACQUISITIONS On March 16, 2001, the Company completed its acquisition of the discrete power products business of Intersil Corporation (DPP) for a purchase price of approximately $343.1 million in cash, including related acquisition expenses. DPP is a leading provider of silicon-based discrete power devices for the computer, communications, industrial, automotive, and space and defense end-user markets. The transaction was accounted for as a purchase and DPP's results of operations since the date of acquisition have been included in the accompanying statement of operations. In connection with the DPP acquisition, the Company recorded a non-recurring charge of $12.8 million for in-process research and development. The remaining purchase price in excess of the fair value of tangible and identifiable intangible assets was allocated to goodwill. Intangible assets have been assigned lives ranging from three to fifteen years. NOTE 6 -- SEGMENT INFORMATION The Company is currently organized into three reportable segments: Analog and Mixed Signal Products Group (Analog), Discrete Products Group (Discrete) and Interface and Logic Products Group (Interface and Logic). The operating results for DPP are included within the Discrete reporting segment. The Company has determined that its Configurable Products business unit (formerly known as the Non-Volatile Memory Division which was reported as a separate segment) and its Optoelectronics Group do not meet the threshold for a separate reportable segment under SFAS No. 131, and accordingly these segments' results are included as part of the "Other" category for all periods presented. The Company's contract manufacturing business is not a separate reportable segment and its results are recorded together with the Configurable Products business unit and the Optoelectronics Group in the "Other" category. Management evaluates the contract manufacturing business differently than its other operating segments, due in large part to the fact that it is predominantly driven by contractual agreements for limited time periods, entered into with the Company's former parent National Semiconductor and Samsung Electronics. Selected operating segment financial information for the three months ended April 1, 2001 and April 2, 2000 is as follows:
THREE MONTHS ENDED -------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- (IN MILLIONS) REVENUE: Analog...................................................... $ 83.7 $ 86.4 Discrete.................................................... 155.2 174.3 Interface and Logic......................................... 92.1 93.5 Other (1)................................................... 54.3 47.5 ------ ------ Total.................................................. $385.3 $401.7 ====== ======
8 9 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED -------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- (IN MILLIONS) OPERATING INCOME: Analog...................................................... $ 4.1 $10.1 Discrete.................................................... 12.3 25.8 Interface and Logic......................................... 21.2 16.8 Other (1)................................................... 3.3 13.3 ------ ----- Subtotal.................................................... 40.9 66.0 Purchased in-process research and development............... (12.8) -- Restructuring and impairments............................... (9.5) 5.6 ------ ----- Total.................................................. $ 18.6 $71.6 ====== =====
- --------------- (1) Other includes revenues and operating income from contract manufacturing activities disclosed in the Company's statements of operations. The Company allocates no other costs to its contract manufacturing business other than those separately shown in the statements of operations. NOTE 7 -- RESTRUCTURING AND IMPAIRMENTS During the first quarter of 2001, the Company recorded a pre-tax restructuring charge of $9.5 million. The restructuring charge consisted of $8.3 million related to non-cash asset impairments and $1.2 million of employee separation costs. The asset impairments relate to the consolidation of the five-inch wafer fabrication line in South Portland, Maine. The employee separation costs relate primarily to severance and other benefits associated with approximately 300 salaried, hourly and temporary employees severed in Cebu, the Philippines. During the first quarter of 2000, the Company recorded a pre-tax restructuring gain of approximately $5.6 million. During the first quarter of 2000, the Company re-evaluated and subsequently adjusted its non-cash restructuring accruals based upon final execution of several of its plans. This resulted in a one-time gain of $2.1 million. The Company also recorded a one-time gain of $3.5 million for additional funds received in connection with the sale of its former Mountain View, California facility. NOTE 8 -- EQUITY Effective March 7, 2001, one of the Company's principal stockholders converted its 17,281,000 shares of Class B into an equal number of to Class A Common Stock. As a result, no Class B shares were outstanding at April 1, 2001. Total common shares outstanding were not affected by this transaction. Shares of the Company's Class A Common Stock and Class B Common Stock are identical in all respects, except that Class B shares have no voting rights, other than as provided by law, and there is no public market for Class B shares. NOTE 9 -- LONG-TERM DEBT In connection with the financing of the DPP acquisition (See Note 5), on January 31, 2001, the Company's principal operating subsidiary, Fairchild Semiconductor Corporation, completed a private offering of $350.0 million of 10 1/2% senior subordinated notes (the "10 1/2% Notes"). Interest on the notes will be paid semi-annually on February 1 and August 1 of each year commencing on August 1, 2001. The 10 1/2% Notes are unsecured and are subordinated to all existing and future senior indebtedness of the Company. The Company may redeem the notes on or after February 1, 2005. Prior to February 1, 2004, the Company may redeem up to 35% of the 10 1/2% Notes from the proceeds of certain equity offerings. Net proceeds from this debt issuance, after deducting the underwriting discount and offering expenses of approximately $10.7 million, were $339.3 million. Beginning on April 30, 2001, the Company initiated an exchange offer for all of the outstanding 10 1/2% Senior Subordinated Notes. The new notes will be substantially identical to the terms of the outstanding notes, 9 10 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) except that certain transfer restrictions, registration rights and liquidated damages provisions relating to the outstanding notes will not apply. The Company's senior credit facility and the indentures governing the 10 1/8% Senior Subordinated Notes, 10 3/8% Senior Subordinated Notes and 10 1/2% Senior Subordinated Notes impose various restrictions and covenants. The restrictive covenants include limitations on consolidations, mergers and acquisitions, restrictions on creating liens, restrictions on paying dividends or making other similar restricted payments, restrictions on asset sales and limitations on incurring indebtedness, among other restrictions. The covenants relating to financial ratios include minimum fixed charge and interest coverage ratios and a maximum leverage ratio. The senior credit facility also limits the Company's ability to modify the certificate of incorporation, bylaws, shareholder agreements, voting trusts or similar arrangements. In addition, the senior credit facility, the indenture governing the 10 1/8% Senior Subordinated Notes, the 10 3/8% Senior Subordinated Notes and the 10 1/2% Senior Subordinated Notes contain additional restrictions limiting the ability of the Company's subsidiaries to pay dividends or make advances to the Company. NOTE 10 -- DERIVATIVES Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, and SFAS 138, which modified certain provisions of SFAS 133. All derivatives, whether designated as hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The Company uses derivative instruments to manage exposures to foreign currencies. Certain forecasted transactions are exposed to foreign currency risks. The Company monitors its foreign currency exposures to maximize the overall effectiveness of its foreign currency hedge positions. Principal currencies hedged include the Euro and the Japanese yen. The Company's objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. Changes in the fair value of derivative instruments related to time value are included in the assessment of hedge effectiveness. Hedge ineffectiveness, determined in accordance with SFAS 133 and SFAS 138, had no impact on earnings for the three months ended April 1, 2001. No cash flow hedges were derecognized or discontinued for the three months ended April 1, 2001. Derivative gains and losses included in OCI are reclassified into earnings at the time the forecasted revenue is recognized. The Company estimates that the entire $2.3 million of net derivative gains included in OCI will be reclassified into earnings within the next twelve months. The adoption of SFAS 133 and SFAS 138 on January 1, 2001, resulted in no cumulative adjustment to income or OCI as no cash flow derivative instruments were outstanding at December 31, 2000. NOTE 11 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) The Company operates through its wholly-owned subsidiary Fairchild Semiconductor Corporation and other indirect wholly-owned subsidiaries. Fairchild Semiconductor International, Inc. and certain of Fairchild Semiconductor Corporation's subsidiaries are guarantors under the 10 1/8%, 10 3/8% and 10 1/2% Senior Subordinated Notes. These guaranties are full and unconditional. In addition, all guaranties are joint and several. Accordingly, presented below are condensed consolidating balance sheets of Fairchild International as of April 1, 2001 and December 31, 2000 and related condensed consolidating statements of operations and cash flows for the three months ended April 1, 2001 and April 2, 2000. 10 11 CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
APRIL 1, 2001 ------------------------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------ ------------------- ASSETS Current assets: Cash and cash equivalents........... $ -- $ 362.2 $ 1.2 $ 14.2 $ -- $ 377.6 Accounts receivable, net................... -- 40.9 7.0 147.2 -- 195.1 Inventories............. -- 113.0 50.2 80.9 -- 244.1 Deferred income taxes... -- 46.5 0.8 -- -- 47.3 Other current assets.... -- 4.0 0.1 6.9 -- 11.0 ------ -------- ------ ------ --------- -------- Total current assets......... -- 566.6 59.3 249.2 -- 875.1 Property, plant and equipment, net.......... -- 258.3 80.0 346.6 -- 684.9 Intangible assets, net.... -- 9.9 319.0 185.9 -- 514.8 Investment in subsidiary.............. 832.4 932.9 148.7 -- (1,914.0) -- Other assets.............. 5.9 52.6 7.7 15.3 -- 81.5 ------ -------- ------ ------ --------- -------- Total assets..... $838.3 $1,820.3 $614.7 $797.0 $(1,914.0) $2,156.3 ====== ======== ====== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........ $ -- $ 77.5 $ 2.2 $ 57.9 $ -- $ 137.6 Accrued expenses and other current liabilities........... -- 66.0 5.3 44.5 -- 115.8 ------ -------- ------ ------ --------- -------- Total current liabilities.... -- 143.5 7.5 102.4 -- 253.4 Long-term debt............ -- 1,059.1 -- -- -- 1,059.1 Net intercompany (receivable) payable.... -- (213.9) 9.2 204.7 -- -- Other liabilities......... -- (1.0) (0.5) 4.6 -- 3.1 ------ -------- ------ ------ --------- -------- Total liabilities.... -- 987.7 16.2 311.7 -- 1,315.6 ------ -------- ------ ------ --------- -------- Commitments and contingencies Stockholders' equity: Class A common stock.... 1.0 -- -- -- -- 1.0 Class B common stock.... -- -- -- -- -- -- Additional paid-in capital............... 801.4 -- -- -- -- 801.4 Retained earnings....... 43.3 830.3 598.5 485.3 (1,914.0) 43.4 Accumulated other comprehensive income................ -- 2.3 -- -- -- 2.3 Less treasury stock (at cost)................. (7.4) -- -- -- -- (7.4) ------ -------- ------ ------ --------- -------- Total stockholders' equity......... 838.3 832.6 598.5 485.3 (1,914.0) 840.7 ------ -------- ------ ------ --------- -------- Total liabilities and stockholders' equity......... $838.3 $1,820.3 $614.7 $797.0 $(1,914.0) $2,156.3 ====== ======== ====== ====== ========= ========
11 12 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED APRIL 1, 2001 ------------------------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------ ------------------- Revenue: Net sales -- trade....... $ -- $ 76.6 $ 7.5 $283.7 $ -- $367.8 Net sales -- intercompany........... -- 230.7 20.1 91.8 (342.6) -- Contract manufacturing... -- 16.0 -- 1.5 -- 17.5 ----- ------ ------ ------ ------- ------ Total revenue..... -- 323.3 27.6 377.0 (342.6) 385.3 Operating expenses: Cost of sales............ -- 35.9 9.3 209.8 -- 255.0 Cost of sales -- intercompany........... -- 228.7 19.0 94.9 (342.6) -- Cost of contract manufacturing.......... -- 11.2 -- 1.0 -- 12.2 Research and development............ -- 12.3 5.2 6.0 -- 23.5 Selling, general and administrative......... -- 26.5 6.6 20.6 -- 53.7 Purchased in-process research and development............ -- -- 12.8 -- -- 12.8 Restructuring and impairments............ -- 8.3 0.4 0.8 -- 9.5 ----- ------ ------ ------ ------- ------ Total operating expenses........ -- 322.9 53.3 333.1 (342.6) 366.7 ----- ------ ------ ------ ------- ------ Operating income (loss).... -- 0.4 (25.7) 43.9 -- 18.6 Interest expense........... -- 23.9 -- -- -- 23.9 Interest income............ -- (7.3) -- (0.1) -- (7.4) Equity in subsidiary income................... (1.6) (15.5) (19.3) -- 36.4 -- ----- ------ ------ ------ ------- ------ Income before income taxes.................... 1.6 (0.7) (6.4) 44.0 (36.4) 2.1 Provision (benefit) for income taxes............. -- (2.3) -- 2.8 -- 0.5 ----- ------ ------ ------ ------- ------ Net income (loss)........ $ 1.6 $ 1.6 $ (6.4) $ 41.2 $ (36.4) $ 1.6 ===== ====== ====== ====== ======= ======
12 13 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED APRIL 1, 2001 ---------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------------- Cash flows from operating activities: $ -- $ 19.3 $1.2 $ 12.7 $ 33.2 ----- ------- ---- ------ ------- Investing activities: Capital expenditures............ -- (22.7) -- (24.7) (47.4) Purchase of molds and tooling... -- -- -- (1.1) (1.1) Purchase of long-term investments.................. -- (3.5) -- -- (3.5) Acquisitions, net of cash acquired..................... -- (343.1) -- -- (343.1) Investment (in) from affiliate.................... 1.6 (1.6) -- -- -- ----- ------- ---- ------ ------- Cash provided by (used in) investing activities....... 1.6 (370.9) -- (25.8) (395.1) ----- ------- ---- ------ ------- Financing activities: Issuance of long-term debt...... -- 350.0 -- -- 350.0 Proceeds from issuance of common stock and from issuance of stock options, net........... 1.8 -- -- -- 1.8 Purchase of treasury stock...... (3.4) -- -- -- (3.4) Debt issuance costs............. -- (10.7) -- -- (10.7) ----- ------- ---- ------ ------- Cash provided by (used in) financing activities....... (1.6) 339.3 -- -- 337.7 ----- ------- ---- ------ ------- Net change in cash and cash equivalents..................... -- (12.3) 1.2 (13.1) (24.2) Cash and cash equivalents at beginning of period............. -- 374.5 -- 27.3 401.8 ----- ------- ---- ------ ------- Cash and cash equivalents at end of period....................... $ -- $ 362.2 $1.2 $ 14.2 $ 377.6 ===== ======= ==== ====== ======= Supplemental Cash Flow Information: Cash paid during the year for: Income taxes................. $ -- $ -- $ -- $ 3.2 $ 3.2 ===== ======= ==== ====== ======= Interest..................... $ -- $ 18.0 $ -- $ -- $ 18.0 ===== ======= ==== ====== =======
13 14 CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 2000 ------------------------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------ ------------------- ASSETS Current assets: Cash and cash equivalents............ $ -- $ 374.5 $ -- $ 27.3 $ -- $ 401.8 Accounts receivable, net.................... -- 53.7 5.1 166.2 -- 225.0 Inventories.............. -- 102.4 9.7 80.7 -- 192.8 Deferred income taxes.... -- 46.5 0.8 -- 47.3 Other current assets..... -- 1.6 3.9 4.0 -- 9.5 ------ -------- ------ ------ --------- -------- Total current assets.......... -- 578.7 19.5 278.2 -- 876.4 Property, plant and equipment, net........... -- 252.4 2.8 341.4 -- 596.6 Intangible assets, net..... -- 11.6 102.4 184.1 -- 298.1 Investment in subsidiary... 831.8 601.6 146.5 -- (1,579.9) Other assets............... 5.9 36.1 16.7 7.7 -- 66.4 ------ -------- ------ ------ --------- -------- Total assets...... $837.7 $1,480.4 $287.9 $811.4 $(1,579.9) $1,837.5 ====== ======== ====== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......... $ -- $ 86.2 $ 0.7 $ 68.4 $ -- $ 155.3 Accrued expenses and other current liabilities............ -- 77.1 5.9 53.9 -- 136.9 ------ -------- ------ ------ --------- -------- Total current liabilities..... -- 163.3 6.6 122.3 -- 292.2 Long-term debt............. -- 705.2 -- -- -- 705.2 Net intercompany (receivable) payable..... -- (213.0) (31.1) 244.1 Other liabilities.......... -- (6.9) 0.3 9.0 -- 2.4 ------ -------- ------ ------ --------- -------- Total liabilities..... -- 648.6 (24.2) 375.5 -- 999.8 ------ -------- ------ ------ --------- -------- Commitments and contingencies Stockholders' equity: Class A common stock..... 0.8 -- -- -- -- 0.8 Class B common stock..... 0.2 -- -- -- -- 0.2 Additional paid-in capital................ 801.1 -- -- -- -- 801.1 Retained earnings........ 41.8 831.8 312.1 436.0 (1,579.9) 41.8 Less treasury stock (at cost).................. (6.2) -- -- -- -- (6.2) ------ -------- ------ ------ --------- -------- Total stockholders' equity.......... 837.7 831.8 312.1 436.0 (1,579.9) 837.7 ------ -------- ------ ------ --------- -------- Total liabilities and stockholders' equity.......... $837.7 $1,480.4 $287.9 $811.4 $(1,579.9) $1,837.5 ====== ======== ====== ====== ========= ========
14 15 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED APRIL 2, 2000 ------------------------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------ ------------------- Revenue: Net sales -- trade....... $ -- $ 89.0 $ -- $279.9 $ -- $368.9 Net sales -- intercompany........... -- 221.2 4.5 12.5 (238.2) -- Contract manufacturing... -- 24.4 -- 8.4 -- 32.8 ------ ------ ------ ------ ------- ------ Total revenue..... -- 334.6 4.5 300.8 (238.2) 401.7 Operating expenses: Cost of sales............ -- 32.8 (6.2) 217.9 -- 244.5 Cost of sales -- intercompany........... -- 218.5 4.5 15.2 (238.2) -- Cost of contract manufacturing.......... -- 16.5 -- 3.5 -- 20.0 Research and development............ -- 10.5 3.4 3.9 -- 17.8 Selling, general and administrative......... -- 29.2 2.5 21.7 -- 53.4 Purchased in-process research and development............ -- -- -- -- -- -- Restructuring and impairments............ -- (2.3) (3.3) -- -- (5.6) ------ ------ ------ ------ ------- ------ Total operating expenses........ -- 305.2 0.9 262.2 (238.2) 330.1 ------ ------ ------ ------ ------- ------ Operating income........... -- 29.4 3.6 38.6 -- 71.6 Interest expense........... -- 20.8 -- -- -- 20.8 Interest income............ -- (3.8) -- (0.2) -- (4.0) Other income, net.......... -- -- -- -- -- -- Equity in subsidiary income................... (50.0) (39.9) (28.8) -- 118.7 -- ------ ------ ------ ------ ------- ------ Income before income taxes.................... 50.0 52.3 32.4 38.8 (118.7) 54.8 Provision for income taxes.................... -- 2.3 -- 2.5 -- 4.8 ------ ------ ------ ------ ------- ------ Net income................. $ 50.0 $ 50.0 $ 32.4 $ 36.3 $(118.7) $ 50.0 ====== ====== ====== ====== ======= ======
15 16 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED APRIL 2, 2000 ---------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------------- Cash flows provided by operating activities: $ -- $ 8.4 $ 0.1 $ 35.8 $ 44.3 ------- ------ ----- ------ ------ Investing activities: Capital expenditures............. -- (22.9) (0.1) (14.6) (37.6) Purchase of molds and tooling.... -- -- -- (0.6) (0.6) Investment (in) from affiliate... (241.0) 241.0 -- -- -- ------- ------ ----- ------ ------ Cash provided by (used in) investing activities........ (241.0) 218.1 (0.1) (15.2) (38.2) ------- ------ ----- ------ ------ Financing activities: Repayment of long-term debt...... -- (0.8) -- -- (0.8) Proceeds from issuance of common stock and from issuance of stock options, net............ 241.0 -- -- -- 241.0 ------- ------ ----- ------ ------ Cash provided by (used in) financing activities........ 241.0 (0.8) -- -- 240.2 ------- ------ ----- ------ ------ Net change in cash and cash equivalents...................... -- 225.7 -- 20.6 246.3 Cash and cash equivalents at beginning of period.............. -- 117.3 -- 21.4 138.7 ------- ------ ----- ------ ------ Cash and cash equivalents at end of period........................... $ -- $343.0 $ -- $ 42.0 $385.0 ======= ====== ===== ====== ====== Supplemental Cash Flow Information: Cash paid during the year for: Income taxes.................. $ -- $ -- $ -- $ 1.5 $ 1.5 ======= ====== ===== ====== ====== Interest...................... $ -- $ 19.2 $ -- $ -- $ 19.2 ======= ====== ===== ====== ======
16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS IN THIS REPORT. SEE "OUTLOOK AND BUSINESS RISKS" BELOW. OVERVIEW We are a leading designer, manufacturer and supplier of building block semiconductors and optoelectronics for multi market uses. Semiconductor product offerings include analog and mixed signal, discrete power and signal technology, interface and logic, and non-volatile memory semiconductors. Optoelectronic product offerings include optocouplers, LED displays and infrared components. These multi-market products serve the telecommunications, consumer, industrial, personal systems and automotive markets. On March 16, 2001, we completed an acquisition of the discrete power business of Intersil Corporation (DPP) for approximately $343.1 million in cash, including related acquisition costs. DPP is a leading provider of silicon-based discrete power devices for the computer, communications, industrial, automotive, and space and defense markets. Included in the acquisition is the industry's only eight inch wafer fabrication facility dedicated to discrete power products, located in Mountaintop, Pennsylvania. RESULTS OF OPERATIONS We generated net income of $1.6 million and $50.0 million in the first quarter of 2001 and 2000, respectively. Excluding restructuring and impairments, purchased in-process research and development and amortization of acquisition-related intangibles, adjusted net income was as follows for the three months ended April 1, 2001 and April 2, 2000, respectively:
THREE MONTHS ENDED --------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- (IN MILLIONS) Net income.................................................. $ 1.6 $50.0 Restructuring and impairments............................. 9.5 (5.6) Purchased in-process research and development............. 12.8 -- Amortization of acquisition-related intangibles........... 10.4 8.4 Less associated tax effects............................... (8.2) (0.2) ----- ----- Adjusted net income......................................... $26.1 $52.6 ===== =====
Restructuring and impairments in the first quarter of 2001 include asset impairment charges related to the consolidation of the five-inch wafer fabrication line in South Portland, Maine ($8.3 million) as well as employee severance and benefit costs associated with approximately 300 salaried, hourly and temporary employees severed primarily in Cebu, the Philippines. Restructuring and impairments in the first quarter of 2000 include gains resulting from our re-evaluation and subsequent adjustment to our non-cash restructuring accruals based upon the final execution of several of our plans ($2.1 million) as well as a one-time gain for additional funds received in connection with the sale of our former Mountain View, California facility ($3.5 million). Purchased in-process research and development of $12.8 million was recorded in the first quarter of 2001 in connection with the DPP acquisition. Operating income was $18.6 million and $71.6 million in the first quarter of 2001 and 2000, respectively. Excluding restructuring and impairments and purchased in-process research and development, operating income was $40.9 million and $66.0 million in the first quarter of 2001 and 2000, respectively. The decrease in operating income is primarily due to soft market conditions in the semiconductor industry in the first quarter of 2001, resulting in underutilization of our factories as well as from lower contract manufacturing revenues. Despite the current industry conditions, we have continued to invest in our research and development effort to drive new product introductions. Excluding depreciation and amortization of $40.5 million and $38.4 million in the first quarter of 2001 and 2000, respectively, restructuring and impairments and purchased in-process research and development, 17 18 earnings before interest, taxes depreciation and amortization (EBITDA) were $81.4 million for the first quarter of 2001 compared to $104.4 million in the first quarter of 2000. EBITDA is presented because we believe that it is a widely accepted financial indicator of an entity's ability to incur and service debt. EBITDA, adjusted net income, and adjusted operating income should not be considered as an alternative to net income, operating income, or other consolidated operations and cash flow data prepared in accordance with generally accepted accounting principles, as an indicator of our operating performance, or as an alternative to cash flow as a measure of liquidity. On a segment basis, Analog had operating income of $4.1 million in the first quarter of 2001 compared to $10.1 million in the first quarter of 2000. Discrete had operating income of $12.3 million in the first quarter of 2001 compared to $25.8 million in the first quarter of 2000. The decreases in Analog and Discrete operating income were mainly a result of decreased gross margins due to decreases in revenue coupled with lower factory utilization. Interface and Logic had operating income of $21.2 million in the first quarter of 2001 compared to $16.8 million in the first quarter of 2000. The increase in operating results for Interface and Logic was due to a combination of slightly higher gross margins despite lower sales, coupled with reduced operating expenses. The higher gross margins are a result of a higher average selling price, due to improved product mix, offset by lower factory utilization. REVENUES Our revenues consist of trade sales to unaffiliated customers (95.5% and 91.8% of total revenues in the first quarter of 2001 and 2000, respectively) and revenues from contract manufacturing services provided to National Semiconductor and Samsung Electronics (4.5% and 8.2% of total revenues in the first quarter of 2001 and 2000, respectively). Trade sales were $367.8 million in the first quarter of 2001 compared to $368.9 million for the first quarter of 2000. Increased revenues from our acquisitions that have taken place since the first quarter of 2000 were offset by lower revenues in our continuing businesses due to the industry-wide market slowdown. On a segment basis, revenues from our optoelectronics group, which is included in our other segment in the first quarter of 2001, offset decreases in our other operating segments. Analog revenues decreased 3.1% to $83.7 million in the first quarter of 2001 compared to $86.4 million in the first quarter of 2000. Discrete revenues decreased 11.0% to $155.2 million in the first quarter of 2001 compared to $174.3 million in the first quarter of 2000. Interface and Logic revenues decreased 1.5% to $92.1 million in the first quarter of 2001 compared to $93.5 million in the first quarter of 2000. The aforementioned revenue decreases were due lower unit volume which was partially offset by increased average selling prices, due primarily to improved product mix. Geographically, 21%, 14%, 47% and 18% of trade sales were derived from North America, Europe, Asia/ Pacific and Korea, respectively, in the first quarter of 2001 as compared to 24%, 15%, 41% and 20%, respectively, in the first quarter of 2000. North American revenues decreased 13% in the first quarter of 2001 compared to the first quarter of 2000. The North American sales region has been hardest hit by the inventory correction occurring in all end market segments. European revenues have decreased 7% in the first quarter of 2001 compared to the first quarter of 2000. They have been impacted by the same factors affecting North America, but to a lesser extent. Revenues in our Asia/Pacific sales region have increased 14% in the first quarter of 2001 compared to the first quarter of 2000. The increase is due to stronger sales in China as well as the migration of contract manufacturing to this region. Sales in our Korean region decreased 10% in the first quarter of 2001 compared to the first quarter of 2000. This decrease is due to the impact of a weaker Korean economy as the financial restructuring of this country continues. Contract manufacturing revenues decreased 46.7% to $17.5 million in the first quarter of 2001 compared to $32.8 million in the first quarter of 2000. The decrease in contract manufacturing revenue results from diminishing demand from both National Semiconductor and Samsung Electronics. 18 19 GROSS PROFIT Gross profit decreased 13.9% to $118.1 million in the first quarter of 2001 compared to $137.2 million in the first quarter of 2000. As a percentage of sales, gross profits were 30.7% in the first quarter of 2001 compared to 34.2% in the first quarter of 2000. Gross trade profit decreased 9.3% to $112.8 million in the first quarter of 2001 compared to $124.4 million in the first quarter of 2000. As a percentage of sales, gross trade profits were 30.7% in the first quarter of 2001 compared to 33.7% in the first quarter of 2000. The decrease in our gross margins is due primarily to lower capacity utilization. Contract manufacturing gross profit decreased 58.6% to $5.3 million in the first quarter of 2001 compared to $12.8 million in the first quarter of 2000. The decrease in contract manufacturing margins is due to lower factory utilization due to reduced demand for these services. RESEARCH AND DEVELOPMENT Research and development expenses ("R&D") were $23.5 million, or 6.4% of trade sales, in the first quarter of 2001, compared to $17.8 million, or 4.8% of trade sales, in the first quarter of 2000. The increases in R&D spending were primarily due to R&D from our acquired businesses in 2000 and continued spending on new product development, focused primarily on our growth products (Analog, Power MOSFETS, Interface, CMOS Logic, and Optoelectronics), despite softer market conditions. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses ("SG&A") were flat at $53.7 million, or 14.6% of trade sales, in the first quarter of 2001, compared to $53.4 million, or 14.5% of trade sales, in the first quarter of 2000, as we offset SG&A from our acquired businesses in 2000 with spending reductions in response to softer market conditions. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT Purchased in-process research and development was $12.8 million in the first quarter of 2001, recorded in conjunction with the acquisition of DPP. RESTRUCTURING AND IMPAIRMENTS We recorded a pre-tax charge of approximately $9.5 million in the first quarter of 2001. This one-time charge was for a non-cash asset impairment in connection with the consolidation of the five-inch wafer fabrication line in South Portland, Maine ($8.3 million) and employee separation costs related primarily to severance and other benefits associated with approximately 300 salaried, hourly and temporary employees severed in Cebu, the Philippines. We recorded a pre-tax gain of approximately $5.6 million during the first quarter of 2000. This includes a gain from our re-evaluation and subsequent adjustment to our non-cash restructuring accruals based upon the final execution of several of our plans ($2.1 million) as well as a one-time gain for additional funds received in connection with the sale of our former Mountain View, California facility ($3.5 million). INTEREST EXPENSE Interest expense was $23.9 million in the first quarter of 2001 compared to $20.8 million in the first quarter of 2000. The increase in interest expense is principally the result of additional interest associated with the $350.0 million 10 1/2% Senior Subordinated Notes which were issued during the first quarter of 2001. INTEREST INCOME Interest income was $7.4 million in the first quarter of 2001 and $4.0 million in the first quarter of 2000. The increase in interest income in 2001 is due to higher average cash balances in 2001. 19 20 INCOME TAXES Income tax expense was $0.5 million for the first quarter of 2001 compared to $4.8 million in the first quarter of 2000. The effective tax rate was 25% for the first quarter of 2001, compared to 9% in the first quarter of 2000. The increase in our effective tax rate is due to the favorable effect of the utilization of deferred tax valuation allowances to offset current year income tax expense in the first quarter of 2000. We did not realize a similar benefit in the first quarter of 2001. In the fourth quarter of 2000, the valuation allowance on our deferred tax asset was reduced because management now believes that it is more likely than not that these assets will be realizable. As a result of this action, our effective tax rate has increased in 2001. LIQUIDITY AND CAPITAL RESOURCES We have a borrowing capacity of $300.0 million on a revolving basis for working capital and general corporate purposes, including acquisitions, under our senior credit facility. At April 1, 2001, we had drawn approximately $120.2 million under our revolving credit facility. In connection with the financing of the DPP acquisition, on January 31, 2001, we finalized a private placement offering of $350.0 million of 10 1/2% Senior Subordinated Notes. Interest on these notes will be paid semi-annually on February 1 and August 1 of each year, beginning August 1, 2001. We may redeem the notes on or after February 1, 2005. Prior to February 1, 2004, we may redeem up to 35% of the notes from the proceeds of equity offerings. Beginning on April 30, 2001, we initiated an exchange offer for all of the outstanding 10 1/2% Senior Subordinated Notes. The new notes will be substantially identical to the terms of the outstanding notes, except that certain transfer restrictions, registration rights and liquidated damages provisions relating to the outstanding notes will not apply. We expect this exchange offer to be completed by May 30, 2001. Our senior credit facility, the indentures governing the 10 1/8% Senior Subordinated Notes, 10 3/8% Senior Subordinated Notes and 10 1/2% Senior Subordinated Notes do, and other debt instruments we may enter into in the future may, impose various restrictions and covenants on us which could potentially limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities. The restrictive covenants include limitations on consolidations, mergers and acquisitions, restrictions on creating liens, restrictions on paying dividends or making other similar restricted payments, restrictions on asset sales and limitations on incurring indebtedness, among other restrictions. The covenants relating to financial ratios include minimum fixed charge and interest coverage ratios and a maximum leverage ratio. The senior credit facility also limits our ability to modify the certificate of incorporation, bylaws, shareholder agreements, voting trusts or similar arrangements. The subsidiaries of Fairchild Semiconductor Corporation are permitted without material restrictions under our debt instruments to pay dividends or make advances to Fairchild Semiconductor Corporation. We believe that those funds permitted to be transferred to us, together with existing cash, will be sufficient to meet our debt obligations. We expect that existing cash and available funds from our senior credit facility and funds generated from operations, will be sufficient to meet our anticipated operating requirements and to fund our research and development and capital expenditures for the next twelve months. We intend to invest approximately $155 to $160 million in 2001 to expand capacity primarily in support of in-sourcing and our e-business initiatives. Additional borrowing or equity investment may be required to fund future acquisitions. As of April 1, 2001, the Company's cash and cash equivalents balance was $377.6 million, a decrease of $24.2 million from December 31, 2000. During the first three months of 2001, our operations provided $33.2 million in cash compared to $44.3 million of cash in the first three months of 2000. The decrease in cash provided by operating activities reflects a decrease in the first three months of 2001 in net income adjusted for non-cash items of $25.3 million offset by a increase in cash flows from changes in operating assets and liabilities of $14.1 million as compared with the first three months of 2000. Cash used in investing activities during the first three months of 2001 totaled $395.1 million, compared to $38.2 million in the first three months of 2000. The increase primarily results from the acquisition of the discrete power business of Intersil Corporation and increased capital 20 21 expenditures for the first three months of 2001. Capital expenditures in the first three months of 2001 were made principally in the Company's wafer fabs, assembly and test facilities and our e-business initiatives, and were part of the Company's 2001 plan. Capital expenditures for the balance of 2001 will continue to be primarily to increase manufacturing capacity in support of our in-sourcing as well as for our e-business initiative. Cash provided by financing activities of $337.7 million for the first three months of 2001 was primarily from the issuance of $350 million of 10 1/2% Senior Subordinated Notes, net of associated fees and expenses of approximately $10.7 million. Cash provided by financing activities of $240.2 million in the first three months of 2000 was due primarily to proceeds from our secondary stock offering. LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING SUBSIDIARIES Fairchild International is a holding company, the principal asset of which is the stock of its subsidiary, Fairchild Semiconductor Corporation. Fairchild International on a stand-alone basis had no cash flow from operations in the first three months of 2001, nor in the first three months of 2000. Fairchild International on a stand-alone basis has no cash requirements for the next twelve months. OUTLOOK This quarterly report includes "forward-looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "anticipates," or "hopeful," or the negative of those terms or other comparable terminology, or by discussions of strategy, plans or intentions. For example, this Outlook section contains numerous forward-looking statements. All forward-looking statements in this quarterly report are made based on management's current expectations and estimates, which involve risks and uncertainties, including those described in the following paragraph. Among these factors are the following: changes in overall economic conditions; changes in demand for our products; changes in inventories at our customers and distributors; technological and product development risks; availability of manufacturing capacity; availability of raw materials; competitors' actions; loss of key customers; order cancellations or reduced bookings; changes in manufacturing yields or output; and significant litigation. Other factors that may affect our future operating results are described in the Business Risks section below and in our annual report on Form 10-K, under the Risk Factors caption in the Business section. Such risks and uncertainties could cause actual results to be materially different from those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements in this quarterly report. We assume no obligation to update such information. During the first quarter of 2001, the slow down that we began to experience at the end of 2000 continued. We have experienced soft end market demand in all market segments, though computers and telecommunications have been hit especially hard. Order cancellations began to slow in the latter part of the first quarter, indicating that, for at least some of our customer base, inventories are beginning to be reduced. We anticipate that our unit demand should bottom within the next one to two quarters. However, we have begun to see more aggressive pricing from our competitors, particularly in the mature areas of our product mix, and expect this to continue until the unit demand begins to turn up and increase steadily for one to two quarters. In response to soft market conditions, we continue to implement our cost reduction plan, and will continue with those efforts throughout 2001. This plan includes re-negotiation of various contracts, in-sourcing production, and aggressive cost containment plans for operating expenses. We expect total second quarter revenues, which will include a full quarter of sales from DPP, to be roughly flat to down 5% sequentially. In line with current expectations for the overall semiconductor market, we expect revenues to be flat to down sequentially in the third quarter of 2001 and improve sequentially in the fourth quarter of 2001. As a result, we anticipate that full year revenues will be down approximately 15% to 20% from 2000. We expect overall gross margins to drop roughly 400 basis points sequentially in the second quarter 2001 due to anticipated price erosion and lower factory utilization. Margins should improve sequentially in the 21 22 second half of 2001 as we expect progress from our cost reduction efforts and improvements in capacity utilization will begin to offset lower pricing. As a result of the above factors, we expect second quarter net income to be at breakeven to a slight loss. In addition, we expect full year 2001 net income to be down significantly from 2000. BUSINESS RISKS Our business is subject to a number of risks and uncertainties, which could cause actual results to differ materially from those expressed in forward-looking statements. The risks described below are not the only ones facing our company. Additional risks not currently known to us or that we currently deem immaterial also may impair our business operations: DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END USER MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS. The semiconductor industry is highly cyclical, and the value of our business may decline during the "down" portion of these cycles. During the latter half of Fiscal 1998 and most of Fiscal 1999, we, as well as many others in our industry, experienced significant declines in the pricing of our products as customers reduced demand forecasts and manufacturers reduced prices to keep capacity utilization high. We believe these trends were due primarily to the Asian financial crisis during that period and excess personal computer inventories. Beginning in the fourth quarter of Calendar 2000 and continuing into 2001, we and the rest of the semiconductor industry experienced backlog cancellations, resulting in slower revenue growth, due to excess inventories at computer and telecommunications equipment manufacturers. We may experience renewed, possibly more severe and prolonged, downturns in the future as a result of such cyclical changes. In addition, we may experience significant changes in our profitability as a result of variations in sales, changes in product mix, price competition for orders, changes in end user markets and the costs associated with the introduction of new products. The markets for our products depend on continued demand for personal computers, cellular telephones and consumer electronics and automotive goods, and these end user markets may experience changes in demand that will adversely affect our prospects. WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO SATISFY CHANGES IN CONSUMER DEMANDS. Our failure to develop new technologies, or react to changes in existing technologies, could materially delay development of new products, which could result in decreased revenues and a loss of market share to our competitors. Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the semiconductor industry. Our financial performance depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. We may not successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive. A fundamental shift in technologies in our product markets could have a material adverse effect on our competitive position within our industry. OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY AFFECT OUR FUTURE PERFORMANCE AND GROWTH. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. We rely on patent, trade secret, trademark and copyright law to protect such technologies. Some of our technologies are not covered by any patent or patent application, and we cannot assure that: - any of the more than 330 U.S. patents owned by us or numerous other patents which third parties license to us will not be invalidated, circumvented, challenged or licensed to other companies; - any of the more than 500 patents that we acquired or licensed in the acquisition of DPP will not be invalidated, circumvented or challenged; or 22 23 - any of our pending or future patent applications will be issued within the scope of the claims sought by us, if at all. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some foreign countries. We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors' rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of such research. Some of our technologies have been licensed on a non-exclusive basis from National Semiconductor Corporation, Samsung Electronics Co., Ltd. and other companies which may license such technologies to others, including, in the case of National Semiconductor commencing on March 11, 2002, our competitors. In addition, under a technology licensing and transfer agreement, National Semiconductor has limited royalty-free, worldwide license rights (without right to sublicense) to some of our technologies. If necessary or desirable, we may seek licenses under patents or intellectual property rights claimed by others. However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for technologies we use could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or our use of processes requiring the technologies. OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY NEGATIVELY AFFECT OUR FINANCIAL RESULTS. Our future success and competitive position depend in part upon our ability to obtain or maintain proprietary technologies used in our principal products, which is achieved in part by defending claims by competitors of intellectual property infringement. The semiconductor industry is characterized by litigation regarding patent and other intellectual property rights. We are involved in lawsuits, and could become subject to other lawsuits, in which it is alleged that we have infringed upon the intellectual property rights of other companies. Our involvement in existing and future intellectual property litigation could result in significant expense to our company, adversely affecting sales of the challenged product or technologies and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. In the event of an adverse outcome as a defendant in any such litigation, we may be required to: - pay substantial damages; - indemnify customers for damages they might suffer if the products they purchase from us violate the intellectual property rights of others; - stop our manufacture, use, sale or importation of infringing products; - expend significant resources to develop or acquire non-infringing technologies; - discontinue processes; or - obtain licenses to the intellectual property we are found to have infringed. We cannot assure you that we would be successful in such development or acquisition or that such licenses would be available under reasonable terms. Any such development, acquisition or license could require the expenditure of substantial time and other resources. WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS OR SUCCESSFULLY INTEGRATE ACQUISITIONS INTO OUR BUSINESS. We plan to pursue additional acquisitions of related businesses. We believe the semiconductor industry is going through a period of consolidation, and we expect to participate in this development. The expense incurred in consummating the future acquisition of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in our company incurring unanticipated 23 24 expenses and losses. In addition, we may not be able to identify or finance additional acquisitions or realize any anticipated benefits from acquisitions we do complete. We are constantly pursuing acquisition opportunities and consolidation possibilities and are in various stages of due diligence or preliminary discussions with respect to a number of potential transactions, some of which would be significant. None of these potential transactions is subject to a letter of intent or otherwise so far advanced as to make the transaction reasonably certain. Should we successfully acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include: - unexpected losses of key employees or customers of the acquired company; - conforming the acquired company's standards, processes, procedures and controls with our operations; - coordinating new product and process development; - hiring additional management and other critical personnel; - negotiating with labor unions; and - increasing the scope, geographic diversity and complexity of our operations. In addition, although Intersil has signed a transitional services agreement to assist us in integrating the DPP operations that we are acquiring from Intersil into our operations, we may encounter unforeseen obstacles or costs in such integration and in the integration of other businesses we acquire. Possible future acquisitions could result in the incurrence of additional debt, contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our financial condition and operating results. AS A RESULT OF THE ACQUISITION OF INTERSIL'S DISCRETE POWER BUSINESS, APPROXIMATELY 330 OF OUR EMPLOYEES ARE COVERED BY A COLLECTIVE BARGAINING AGREEMENT. OUR FAILURE TO INTEGRATE THESE EMPLOYEES SUCCESSFULLY COULD ADVERSELY AFFECT US. As a result of the DPP acquisition, at April 1, 2001 approximately 330 of our employees were covered by a collective bargaining agreement. We cannot assure you that we will successfully integrate these new employees into our business or what effect, if any, their collective bargaining agreement will have on our employee relations generally. PRODUCTION TIME AND THE OVERALL COST OF PRODUCTS COULD INCREASE IF WE WERE TO LOSE ONE OF OUR PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE PRICES OF RAW MATERIALS. Our manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. Our results of operations could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly. We purchase raw materials such as silicon wafers, lead frames, mold compound, ceramic packages and chemicals and gases from a limited number of suppliers on a just-in-time basis. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In addition, we subcontract a portion of our wafer fabrication and assembly and test operations to other manufacturers, including Carsem, Amkor NS Electronics (Bangkok) Ltd., Samsung Electronics and Korea Micro Industry and, as a result of the acquisition of Intersil's discrete power business, ChipPAC, Inc. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated. DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, EXPANDING CAPACITY AT EXISTING FACILITIES, IMPLEMENTING NEW PRODUCTION TECHNIQUES, OR IN CURING PROBLEMS ASSOCIATED WITH TECHNICAL EQUIPMENT MALFUNCTIONS, ALL COULD ADVERSELY AFFECT OUR MANUFACTURING EFFICIENCIES. 24 25 Our manufacturing efficiency is an important factor in our profitability, and we cannot assure you that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors. Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. In addition, we are currently engaged in an effort to expand capacity at our manufacturing facilities. As is common in the semiconductor industry, we have from time to time experienced difficulty in beginning production at new facilities or in effecting transitions to new manufacturing processes. As a consequence, we have suffered delays in product deliveries or reduced yields. We may experience delays or problems in bringing planned new manufacturing capacity to full production. We may also experience problems in achieving acceptable yields, or experience product delivery delays in the future with respect to existing or planned new capacity as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues. Our operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately. A SIGNIFICANT PORTION OF OUR SALES ARE MADE BY DISTRIBUTORS WHO CAN TERMINATE THEIR RELATIONSHIPS WITH US WITH LITTLE OR NO NOTICE. THE TERMINATION OF A DISTRIBUTOR COULD REDUCE SALES AND RESULT IN INVENTORY RETURNS. Distributors accounted for 53.9% of our net sales for the three months ended April 1, 2001. Our five domestic distributors accounted for 8.4% of our total net sales for the three months ended April 1, 2001. As a general rule, we do not have long-term agreements with our distributors and they may terminate their relationships with us with little or no advance notice. Distributors generally offer competing products. The loss of one or more of our distributors, or the decision by one or more of them to reduce the number of our products they offer or to carry the product lines of our competitors, could have a material adverse effect on our business, financial condition and results of operations. The termination of a significant distributor, whether at our or the distributor's initiative, or a disruption in the operations of one or more of our distributors, could reduce our net sales in a given quarter and could result in an increase in inventory returns. THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY. The semiconductor industry is, and the multi-market semiconductor product markets in particular are, highly competitive. Competition is based on price, product performance, quality, reliability and customer service. In addition, even in strong markets, price pressures may emerge as competitors attempt to gain a greater market share by lowering prices. Competition in the various markets in which we participate comes from companies of various sizes, many of which are larger and have greater financial and other resources than we have and thus are better able to pursue acquisition candidates and can better withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may introduce competing products in the future. THE COSTS TO OPERATE THE DISCRETE POWER PRODUCTS BUSINESS ACQUIRED FROM INTERSIL MAY INCREASE. Prior to our acquisition of the discrete power products business, Intersil operated that business as a division. Since the consummation of the DPP acquisition, DPP incurred $1.1 million in costs for research and development, sales and marketing and general and administrative activities. These costs represent expenses incurred directly by DPP and charges incurred under the transition services agreement with Intersil. Although Intersil has agreed to provide certain of these services for a transition period under a transitional services agreement, DPP will need to obtain many of these services on an arm's length basis. We cannot assure you that we will be able to obtain similar services on comparable terms. In addition, although Intersil will aid us in integrating the DPP operations into our operations pursuant to the transitional services agreement, we may encounter unforeseen obstacles or costs in such integration. WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH SAMSUNG ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE BUSINESS IN 1999. ANY DECREASE IN THE PURCHASE 25 26 REQUIREMENTS OF SAMSUNG ELECTRONICS OR THE INABILITY OF SAMSUNG ELECTRONICS TO MEET ITS CONTRACTUAL OBLIGATIONS COULD SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE. As a result of the acquisition of the power device business in 1999, we have numerous arrangements with Samsung Electronics, including arrangements relating to product sales, designation as a vendor to affiliated Samsung companies and other services. Any material adverse change in the purchase requirements of Samsung Electronics, in its ability to supply the agreed-upon services or in its ability to fulfill its other obligations could have a material adverse effect on our results of operations. Although historically the power device business generated significant revenues from the sale of products to affiliated Samsung companies, we cannot assure you that we will be able to sell products to affiliated Samsung companies or that the designation of the power device business as a vendor to those affiliated Samsung companies will generate any revenues for our company. Furthermore, under the Korean Fair Trade Law, the Fair Trade Commission may issue an order requiring a change in the terms and conditions of the agreements between us and Samsung Electronics if it concludes that Samsung Electronics has provided us with undue support or discriminated against our competitors. THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK. As a result of the acquisition of the power device business in 1999, we have significant operations in South Korea and are subject to risks associated with doing business in that country. In addition to other risks disclosed relating to international operations, some businesses in South Korea are subject to labor unrest. Also, relations between South Korea and North Korea have been tense over most of South Korea's history. We cannot assure you as to whether or when this situation will be resolved or change abruptly as a result of current or future events. An adverse change in economic or political conditions in South Korea or in its relations with North Korea could have a material adverse effect on our Korean subsidiary. The power device business' sales are denominated primarily in U.S. dollars while a significant portion of its costs of goods sold and its operating expenses are denominated in South Korean won. Although we have taken steps to fix the costs subject to currency fluctuations and to balance won revenues and won costs, a significant change in this balance, coupled with a significant change in the value of the won relative to the dollar, could have a material adverse effect on our financial performance and results of operations. In addition, an unfavorable change in the value of the won could require us to write down our won-denominated assets. A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN US NOT RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS. The transaction structure we used for the acquisition of the power device business is based on assumptions about the various tax laws, including withholding tax, and other relevant laws of foreign jurisdictions. In addition, our Korean subsidiary was granted a ten-year tax holiday under Korean law in 1999. The first seven years are tax-free, followed by three years of income taxes at 50% of the statutory rate. In Calendar 2000, the tax holiday was extended such that the exemption amounts were increased to 75% in the eighth year and a 25% exemption was added to the eleventh year. If our assumptions about tax and other relevant laws are incorrect, or if foreign taxing jurisdictions were to change or modify the relevant laws, or if our Korean subsidiary were to lose its tax holiday, we could suffer adverse tax and other financial consequences or lose the benefits anticipated from the transaction structure we used to acquire that business. OUR INTERNATIONAL OPERATIONS SUBJECT OUR COMPANY TO RISKS NOT FACED BY DOMESTIC COMPETITORS. Through our subsidiaries we maintain significant operations in the Philippines, Malaysia and South Korea and also operate facilities in China and Singapore. We also have sales offices and customers around the world. The following are risks inherent in doing business on an international level: - changes in import duties; - trade restrictions; 26 27 - transportation delays; - work stoppages; - economic and political instability; - foreign currency fluctuations; and - the laws, including tax laws, and policies of the United States and of the countries in which we manufacture our products. WE ARE SUBJECT TO MANY ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD AFFECT OUR OPERATIONS OR RESULT IN SIGNIFICANT EXPENSES. Increasingly stringent environmental regulations restrict the amount and types of pollutants that can be released from our operations into the environment. While historically the cost of compliance with environmental laws has not had a material adverse effect on our results of operations, compliance with these and any future regulations could require significant capital investments in pollution control equipment or changes in the way we make our products. In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of liabilities and claims, regardless of fault, resulting from accidental releases, including personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings. For example: - we currently are remediating contamination at some of our operating plant sites; - we have been identified as a potentially responsible party at a number of Superfund sites where we (or our predecessors) disposed of wastes in the past; and - significant regulatory and public attention on the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs. Although most of our known environmental liabilities are covered by indemnities from Raytheon Company or National Semiconductor, these indemnities are limited to conditions that occurred prior to the consummation of those transactions. Moreover, we cannot assure you that their indemnity obligations to us for the covered liabilities will be adequate to protect us. WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE TECHNICAL OR MANAGEMENT EMPLOYEES NECESSARY TO REMAIN COMPETITIVE IN OUR INDUSTRY. Our continued success depends on the retention and recruitment of skilled personnel, including technical, marketing, management and staff personnel. In the semiconductor industry, the competition for qualified personnel, particularly experienced design engineers and other technical employees, is intense. There can be no assurance that we will be able to retain our current personnel or recruit the key personnel we require. In addition, we do not have employment agreements with most members of our senior management team. A SUBSTANTIAL NUMBER OF SHARES OF OUR COMPANY'S COMMON STOCK ARE OWNED BY A LIMITED NUMBER OF PERSONS, AND THEIR INTERESTS MAY CONFLICT WITH YOUR INTERESTS. Court Square Capital Limited, which is one of our principal stockholders, and our directors and executive officers together own approximately 31.4% of the outstanding shares of our Class A Common Stock (including shares underlying vested options). By virtue of such stock ownership, such persons have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to stockholders for approval, including the election of its directors and amendment of our charter and bylaws. Such persons may exercise their influence over us in a manner detriment to the interests of our stockholders or bondholders. See "Principal Stockholders." WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF 1.26 TO 1, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND COMPETE. At April 1, 2001 we would have had total indebtedness of $1,059.1 million and a ratio of debt to equity of 1.26 to 1. 27 28 Our substantial indebtedness could have important consequences. For example, it could: - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; - increase the amount of our interest expense, because certain of our borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense; - increase our vulnerability to general adverse economic and industry conditions; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; - make it more difficult for us to satisfy our obligations with respect to the instruments governing our indebtedness; - place us at a competitive disadvantage compared to our competitors that have less indebtedness; and - limit, along with the financial and other restrictive covenants in our debt instruments, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE INDEBTEDNESS. INCURRING MORE INDEBTEDNESS COULD EXACERBATE THE RISKS DESCRIBED ABOVE. We may be able to incur substantial additional indebtedness in the future. Although the terms of the indentures governing Fairchild Semiconductor Corporation's outstanding 10 1/8% Senior Subordinated Notes, its outstanding 10 3/8% Senior Subordinated Notes, its outstanding 10 1/2% Senior Subordinated Notes and the credit agreement relating to the senior credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions could be substantial. The senior credit facility permits borrowings of up to $300.0 million. As of April 1, 2001 we had $179.8 million available under this revolving credit facility. If new debt is added to our subsidiaries' current debt levels, the substantial risks described above would intensify. WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS, WHICH MAY REQUIRE US TO REFINANCE OUR INDEBTEDNESS OR DEFAULT ON OUR SCHEDULED DEBT PAYMENTS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our historical financial results have been, and our future financial results are anticipated to be, subject to substantial fluctuations. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or at all, or that future borrowings will be available to us under our senior credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In addition, because our senior credit facility has variable interest rates, the cost of those borrowings will increase if market interest rates increase. If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We cannot assure you that we would be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT RELATING TO OUR SENIOR CREDIT FACILITY, THE INDENTURES GOVERNING FAIRCHILD SEMICONDUCTOR CORPORATION'S 10 1/8% SENIOR SUBORDINATED NOTES, ITS 10 3/8% SENIOR SUBORDINATED NOTES, AND ITS 10 1/2% SENIOR SUBORDINATED NOTES RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN OR 28 29 ENTER INTO SOME BUSINESS OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE BUSINESS OPPORTUNITIES. The operating and financial restrictions and covenants in our debt instruments, such as the credit agreement relating to our senior credit facility, the indenture governing Fairchild Semiconductor Corporation's 10 1/2% Senior Subordinated Notes, the indenture governing its 10 1/8% Senior Subordinated Notes, the indenture governing its 10 3/8% Senior Subordinated Notes may limit our ability to finance our future operations or capital needs or engage in other business activities that may be in our interests. Our debt instruments impose significant operating and financial restrictions on us that affect our ability to incur additional indebtedness or create liens on our assets, pay dividends, sell assets, engage in mergers or acquisitions, make investments or engage in other business activities. These restrictions could place us at a disadvantage relative to competitors not subject to such limitations. In addition, the senior credit facility contains other and more restrictive covenants and prohibits us from prepaying our other indebtedness. The senior credit facility also requires us to maintain specified financial ratios. These financial ratios become more restrictive over the life of the senior credit facility. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants, ratios or restrictions could result in an event of default under the senior credit facility. Upon the occurrence of an event of default under the senior credit facility, the lenders could elect to declare all amounts outstanding under the senior credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness. If the lenders under the senior credit facility accelerate the payment of the indebtedness, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, in Fairchild International's annual report on Form 10-K for the year ended December 31, 2000 and under the subheading "Quantitative and Qualitative Disclosures about Market Risk" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 27 of Fairchild International's Annual Report to Stockholders for the year ended December 31, 2000. 29 30 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a defendant in a patent infringement lawsuit filed by Siliconix Incorporated in the United States District Court for the Northern District of California. The complaint filed in the suit alleges that some of our products infringe two Siliconix patents and claims an unspecified amount of damages. We intend to continue contesting these claims vigorously. We are a defendant in a patent infringement lawsuit filed by U.S. Philips Corporation in the United States District Court for the Southern District of New York. The complaint filed in the suit alleges that some of our products infringe one Philips patent and claims an unspecified amount of damages. We intend to continue investigating these allegations and contesting these claims vigorously. In addition to the above proceedings, from time to time we are involved in other legal proceedings in the ordinary course of business. We believe that there is no such ordinary course litigation pending that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K On January 31, 2001, we filed a special report on Form 8-K in connection with our announcement to acquire the discrete power products business of Intersil Corporation as well as the agreement to sell $350.0 million of 10 1/2% Senior Subordinated Notes due 2009 to finance this acquisition. On March 21, 2001 we filed a special report on Form 8-K in connection with our announcement of the completion of our acquisition of the discrete power products business from Intersil Corporation. ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 30 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fairchild Semiconductor International, Inc. Date: May 14, 2001 By: /s/ DAVID A. HENRY ------------------------------------------ David A. Henry Vice President, Corporate Controller (Principal Accounting Officer)
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